How this for objective analysis?
NEW YORK — Shares of four home builders rose in premarket electronic trading Tuesday after an upgrade from a Banc of America analyst, who said the stocks will rise because lower home prices will lead to increased demand.
Daniel Oppenheim upgraded shares of KB Home, MDC Holdings Inc. and Pulte Homes Inc. to "Buy" from "Neutral," and raised Toll Brothers Inc. stock to "Neutral" from "Sell." He said he thinks the stocks will rise by an average of 20 percent as demand for homes gradually rises through the rest of the year.
Oppenheim, who named KB Home and MDC as his top picks in the sector, said home sales have declined because prices were too high for buyers.
I would argue that not only were prices too high, but the market was saturated as speculators had their fill and homeownership levels reached unsustainable heights. Therefore, lower prices would be insufficient for a serious increase in demand.
Oppenheim’s explanation for why these stocks will rise?
"Recent declines in mortgage rates and home prices have resulted in affordability levels better than the average from ‘91-’07," he said. He added that a decrease in construction will leave the home builders with lower inventory levels, and real estate agents are showing more homes, which means sales are going to rise.
"Better than the average from ‘91-’07"? Interesting period to compare to, don’t you think? Who uses a 16 year average for these comparisons? While prices have come down, they remain high in comparison with historical norms, and housing is not yet "affordable" for most people, who are currently nervous about their jobs and the economy. In addition, builders may be building more slowly, but they continue to build. There will be no serious dent in the inventory this year.
The other great comment was the one referring to agents showing more homes. Yes, even in a year that is generally expected to be dismal, real estate is seasonal, and an increase in traffic month-to-month is to be expected. After all, guys like Oppenheim keep telling people that housing is more affordable now, so they are going out and kicking the tires. I’m out looking too, [academic curiosity, not "pent up demand"] but that doesn’t mean that any of us are buying anything.
Lower prices will mean lower margins, while land write-offs continue and inventory needs to be carried. It seems like increased profitability for HBs uncer these condtions is unlikely. Yes demand will gradually rise, then fizzle in the fall like it always does. My expectation is that year-over-year, sales will be down- also bad news for HBs.
Wasn’t it Bank of America that had to write down $3B in subprime losses last November and warned there could be more? They didn’t see things headed down, but now they see things looking up? I’m not convinced.
Hey guys,
I thought this was a great read: http://money.cnn.com/2008/01/29/real_estate/Housing_unaffordability_persists/index.htm?postversion=2008013118
Newsflash! Homes are way overpriced for the average Joe. Now how did everyone afford all these houses the last 5 years? Oh…no money down and illusionary interest rates.
Silver lining though, is NAR predicts that prices will ” be flat in 2008 with an uptick in the last two months”
Kind of like the Captain of the Titanic saying ‘All is well!” as she goes down by the nose.
Wow this is going to get ugly this year
An interesting point. Most of the affordability calculators take the median house and compare it to the median salary, and chart it over time. Sure the median house has gotten less affordable over time. But it has also gotten much much bigger.
In 1950 the average house was around 1000 sf, with 102 bathrooms. Today, 2500 sf, with 3-4 bathrooms. Much more wiring, plumbing, heating, etc. We have AC standard in most homes.
Just like cars have gotten more “unaffordable”. While this is literally true, you certainly get more car for your money. More equipment, better engineered, safer, and longer lasting than the cars of 20-30 years ago. you get what you pay for.
Further the comparisons are garbage. Who buys the median house as their first home? I didn’t, my brothers didn’t, my friends didn’t, and my parents didn’t. They all bought smaller “starter” homes they were in for 3-7 years. Buying a place secures a position against inflation, and starts you on the property ladder. Or you rent (if it is cheap enough) and start saving for a large down payment. a$1000 down is better than an extra $1000 in income.
Also a 16 year period is kind of a weird one, but the length is great. I am curious why they picked 16, as opposed to 5, 10, 15 or 30, which would be useful.
The other issue this: Builders still have a glut of inventory. They will decrease the price so much, that these home will have to sell. Then you will see an increase in new home sales.
That is when the realtors of the world will begin to say we are recovering.
Vicious cycle.
I felt compelled to disagree with the point about the median house size increase being a large factor in the disparity in affordability, and echo the point both twist and Josiphos are making in this thread (and blog).
Further the comparisons are garbage. Who buys the median house as their first home? I didn’t, my brothers didn’t, my friends didn’t, and my parents didn’t. They all bought smaller “starter” homes they were in for 3-7 years.
While I completely agree with the point that no one buys a huge or even “median” house as their first house, unless they’ve encountered some windfall, the big problem is that most classical “starter homes” these days are out of reach of most buyers. For example, my sister was an elementary school teacher making ~25-30k back in 1999/2000. She was able to purchase a cozy 1000 sq. ft. town-home that shared a wall with her neighbor, had a tiny backyard big enough for a small dog to run around, and a two-car garage for around $89k. Today the same house is being listed at $249k. This wasn’t in north scottsdale, or central tempe right by ASU. This house is located in far east mesa. I find the price offensive for the area. How are teachers, nurses, and other essential wage earners supposed to afford a “starter home” when all the real “starter homes” are being priced way too high?
In 1950 the average house was around 1000 sf, with 102 bathrooms. Today, 2500 sf, with 3-4 bathrooms. Much more wiring, plumbing, heating, etc. We have AC standard in most homes… you get what you pay for.
I’m going to go out on a limb here and say that I don’t agree with this point but for different reasons that square footage. The point correctly states that most new homes in the “median” range are being built with more square footage. However, the rub is in the starter homes. I’ll use DRHorton as a good example. Starter homes of today are being built like shoe boxes that share two thin walls with either neighbor on each side (or worse you’re in a tri-plex unit that is designed by someone on too much caffiene), no backyard, a single car garage, a small patio that isn’t conducive to using a bbq grill, and “streets” that are so narrow any guests or friends don’t have anywhere to park! To top it all off these units rarely go over 1200 square feet and are three stories making cooling in the summer time a nightmare. I call this an apartment with more responsibility. How much are they asking for this wonderful slice of heaven? A minimum of $176k. Not to mention $160/mo. for HOA fees, and the fact that you’re now on the hook for repairs and maintenance.
I completely and fully agree with you that folks in my generation need to be realistic about their first home. However, the new definition of a “starter home” based off the example above and other units I’ve looked at seems to be “apartment”. In fact the only “homes” that I can even fit into my price range are either those same 1950’s homes that have not been upgraded since in neighborhoods that require I wear a bullet proof vest, or a “home” that is really an apartment complex gone condo. If I’m willing to be realistic and know that I won’t be able to buy a fancy 5,000 sq. ft. home on a fresh-out-of-college wage, then the baby boomers and generation X need to be realistic with their asking prices of starter homes in their portfolio’s. :/
[hopefully this all makes sense, lunch is over :/]
Affordability is another scam/myth. Ban housing evictions. Housing will never recover. It will fall 60-80% in a year. The economy is collapsing.
I just came out of California and I can tell you I was terrified of how I was going to afford a house of ANY size. Said house would then be 1 hour from my job, by traveling on congested roads with other angry suburbanites.
Thats not Life. Thats living death.
So I got the heck out of CA and came to NC where things are much more affordable.
Whats the point of this story? Simple. This next downturn is desperately NEEDED. Americans need to get punched in the gut…HARD. A major change in our lifestyles is what we need to face, and we won’t do it unless we are forced.
We can’t just keep going on and on like we are, spending more than we make. The bill comes due eventually, and unchecked, the USA will end up a broken, debtor nation to the rest of the world.
Assemblyronin, thanks for your points.
Let me respond.
Starter homes are out of the reach of “most” buyers.
I disagree with this. “Most” buyers do not have an income equal to the starting wages of a teacher’s salary. If you mean your point to say, “most” individuals starting out in their careers do not have sufficient income to purchase a home right out of college, I am not sure I would agree, but feel that “many” would be an accurate response. I don’t have a problem with this.
Lets take your sister. She made 30k as a teacher, by essentially working 3/4 time. Her house payment – at 89k at 8% (the going rate in 2000)- assuming nothing down was around 660. Which would have been slightly more expensive than a small apartment when you add in the HOA fees, but she has a 2 car garage, which is a very valuable thing. Turn the clock forward 8 years. Rents are much more. Say 1000 a month. For the same cost – you can afford a 185,000 mortgage. So while your sister’s condo is more unaffordable than it used to be , it is not so mcuh more. Also, undesirable “east mesa” is now the center of town almost. in 8 years the sprawl and changes have increased the desirability of closer in residences. Especially east mesa, with the 101 & 202 making downtown and scottsdale much more convenient.
How are teachers, nurses, and other essential wage earners supposed to afford a “starter home” when all the real “starter homes” are being priced way too high?
Why should we expect a single income to be able to afford a home on their own? A teacher now can have roomates – or share an apartment until a sufficient down payment is reached.
I feel bad for families – because I believe it is best for kids to be raised at home by a parent. But children can be postponed. Mothers can work during the day, and fathers at night. Mothers can get part time jobs, or can watch other children. We can also assist with housing for these families.
I’m going to go out on a limb here and say that I don’t agree with this point but for different reasons that square footage. The point correctly states that most new homes in the “median” range are being built with more square footage. However, the rub is in the starter homes.
Well – even in the small houses you illustrated, you still have increased construction costs. An additional bathroom, increased wiring, more costly windows, insulation, longer lasting shingles. Air conditioning. All things that a 1950s house would not have had. Further land costs have increased. We have more people around, driving the supply of desirable land down and the cost up (want to live less than an hour from downtown). My parents bought a lot in south tempe 23 years ago for $25k. The same lot today would be 15-20 times the price. It was on the edge – now is the center of town.
Further, builders build what people buy. They are capitalists, and build what sells.
If I’m willing to be realistic and know that I won’t be able to buy a fancy 5,000 sq. ft. home on a fresh-out-of-college wage, then the baby boomers and generation X need to be realistic with their asking prices of starter homes in their portfolio’s. :/
If you can only afford an apartment, that’s all you can afford. There is no shame in that. And there is no god-given right to afford a home.
Also, those holding homes are realistic. Maybe not from day to day, or month to month, but from year to year, they will be. If they can’t sell them for the original price, they will lower them to sell. If the price gets lower than the benefit from renting they will rent them. They won’t give them away as charity (unless they want to give charity).
Demand meets supply. Supply meets demand. By either raising supply, or decreasing demand. There is a reason california is so expensive. People want to live there ,and the supply of houses close to the beach, studios etc, isn’t increasing (orat least as fast as demand). in the short term there are dips, like we see now. But for the past 50 years more people have wanted to move or stay in southern california than have left or died. Thus housing demand increases, and supply, constrained by natural limitaions (distance and geography) and artificial barriers (zoning, density regulations etc) causes prices to rise.
If you don’t like the price, don’t buy.
I might have sympathy if you couldn’t afford housing of any kind ,such as sharing an apartment, or a basic 600 sf apt (as i lived in for 6 years). But not being able to afford a 1200 sf house with a garage does not invoke a desire to change the system.